2018 was a tale of two markets. From January 1 through September 21, the S&P 500 gained over 11%. From that peak through the end of the year however, the index lost almost 14%. Hit especially hard were the heretofore celebrated FAANGs (Facebook, Apple, Amazon, Netflix, Google). We calculate that the average FAANG retreated about 21% since the market peak. While our general strategy of holding high-quality, reasonably-priced stocks along with a supply of cash trailed during the first three quarters of the year, it held up quite favorably during the last.
Whether the recent jitters are the beginning of an actual bear market is anyone’s guess. The ferocity of the decline has at least reintroduced the possibility of a more sizable downturn. Since the 1920s, there have been 10 separate periods when the S&P 500 fell at least 15% from its previous peak. On average these bear markets lasted just under a year and a half, and the median drawdown was almost 30%. The historical record would thus indicate we could potentially have more downturn to go, if indeed we have entered a new phase of the cycle.
The reasons we bring this to your attention are threefold. First, if you cannot time the upward and downward cycles of the stock market (and we believe no one can), it seems apparent that a solid all-weather strategy is needed. In our opinion, price-conscious stock buying is always sensible, but it becomes absolutely critical when economic uncertainty looms. Second, the previously-mentioned cash reserve not only further cushions the downside, but enables fund managers to buy wish-list stocks at more attractive valuations. Finally, our financial planning process accounts for inevitable stock market declines by determining your cash needs and securing several years of income in relatively safe instruments (CDs, Treasuries, money market funds) so that you don’t become a forced seller at an inopportune time.
Everything we do at NorthWest Financial is geared towards helping you achieve your financial goals, no matter the vicissitudes of the market. We are always available to address your questions and concerns.
Aaron Pettersen, CFA, CFP®